The opinion is the first appellate decision to address whether Google's sale of other companies' trademarks for sponsored links could give rise to liability for trademark infringement.

In a lawsuit filed in 2009, Rosetta Stone accused Google of committing trademark infringement by selling the language-software maker's trademarks to third-party advertisers for use as search keywords. A Virginia district court had dismissed the case in 2010, finding that the sale of the keywords was not likely to confuse consumers.

But U.S. Court of Appeals for the 4th Circuit overturned most of the lower court's ruling, reviving claims that Google committed direct trademark infringement and diluted the Rosetta Stone brand.

"A reasonable trier of fact could find that Google intended to cause confusion in that it acted with the knowledge that confusion was very likely to result from its use of the marks," Chief Judge William Traxler wrote for the three-judge panel.

Rosetta Stone accused Google of profiting by allowing rivals to purchase trademarked keywords that generate links to their sites when users enter those search terms. Google allows advertisers to buy the top "sponsored link" ad on search result pages. Rosetta Stone argued that people searching for its products on Google were being redirected to competitors and software counterfeiters.

The language-software maker presented deposition testimony of five consumers who attempted to buy bogus Rosetta Stone software after Google started allowing use of trademarks in the text of sponsored links in 2009.

That evidence persuaded the 4th Circuit panel to revive the trademark infringement and dilution claims. The panel also cited an internal Google study finding that even sophisticated consumers were sometimes unaware that sponsored links were advertisements.

The appeals court also reinstated Rosetta Stone's trademark dilution claims. The lower court had granted summary judgment in Google's favor, finding that the Internet giant was not trying to pass off its own goods and services as Rosetta Stone's. But that fact could not defeat the dilution claims, the 4th Circuit ruled.

The panel directed the lower court to reconsider when Google first appeared to dilute the Rosetta Stone trademark, and whether that trademark was "famous" at the time.

Google and its lawyer, Margret Caruso of Quinn Emanuel Urquhart & Sullivan, did not immediately respond to requests for comment.

"We're very pleased with the opinion, and we think it is an important precedent," said Rosetta Stone's lawyer Cliff Sloan of Skadden, Arps, Slate, Meagher & Flom.

The case is Rosetta Stone Ltd v. Google Inc, U.S. Court of Appeals for the 4th Circuit, No. 10-2007.